Wednesday, September 15, 2010

September 15, 2008: What We Were Posting

The night before, Sunday Sept. 14, it was apparent that Lehman would fail.
I had been sleeping in the office since Thursday and getting an awful lot of emails from Washington Mutual depositors. I had to go home.
It would have been depressing if it hadn't been so nuts.
I put up this post at 8:23 p.m. Pacific:One Way or Another We Will Get Through This

I've got to get some rack time but before I head out I'll get a little more personal than I usually do. I have been at the market my entire adult life and have seen the best and worst of human nature. To augment personal experience I have studied and read tens of thousands of pages, everything from popular histories to incomprehensible academic works.

The one lesson worth knowing is: "There will always be opportunity". It may not be easy and it may not be fast but the opportunity is there every morning. The place to start is to PAY ATTENTION. That alone will get you into the second quartile.
Take a look at the first decade of the last century in the chart below:

A forty percent drop from 1901 to1903. A 120% up move in the next two years. Followed by a 50% crash in the next 23 months. Wrapping up with a 60% 13 month run to the upside.

Two Panics, a Presidential assassination and an earthquake.
The conditions are different but we'll get through this.
Chart from Dow Jones Indexes.

The credit contraction we've seen and will see is massive. The credit card companies are already cutting limits, prime brokers are pulling in unused lines from hedge funds, upside down mortgages that have to be written off, it's in the Trillions, maybe tens of trillions. The Fed, the Treasury, the Bureau of Engraving can't reliquify as fast as we're contracting....

UPDATE: We have many, many posts on WaMu. Use the 'Search Blog' box keywords "Washington Mutual" for the list.

Original Post:
When I first came to the market I met a man who watched the near failures of Goodbody and F.I. duPont, Glore, Forgan in the early '70's. This was about the time that the Securities Investor protection Corp. was authorized. He told me that at first he assumed all would be well for retail investors. During the '73-'74 bear market he changed his mind and would only deal with the strongest firms.

What changed his mind? He realized that if a firm were to fail, it would probably be during a period of financial distress. This is precisely the time you want maximum flexibility and although the guarantee was probably good, if there were any glitches in the liquidation or transfer of his account that HE would be the one bearing the risk. He decided to only do business with the soundest firms, even if it cost him extra fees or commissions. He summed it up by saying "You never want to call the firm and have the receptionist answer 'Hello, SIPC'''

That was not intended as schadenfreude, I was actually feeling for the risk manager who had done all the right things, insured the rent payment, gone to a triple A company only to have it turn into a joke:

Boss, I've got good news and bad news...
Well, the good news is Lehman's rent was insured
The bad news is, the insurer is AIG.